Tax threat sends US shares plunging

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WALL STREET finally took the threat of new taxes seriously yesterday, driving share prices down sharply and for the first time pushing interest rates up on long-term government bonds.

The dollar also dropped sharply, allowing the pound to bounce back after recent weakness. In London the pound gained 2.95 cents to close at dollars 1.4465. It also rose by 1.73 pfennigs to finish at DM2.3667. Against a basket of other currencies, the pound gained 0.8 of a percentage point to close at 76.9 per cent of its 1985 value, its highest for over a week.

Share prices in New York plummeted across the board in the wake of President Bill Clinton's nationally televised speech on Monday evening, warning of painful measures designed to reduce America's budget deficit. Despite an announcement of restrictions on computer selling about 90 minutes into the New York trading session, the Dow Jones Industrial Average continued to fall, closing at its lowest point for the day at 3,309.49, down 82.94 points.

The broader Standard & Poors 500 index was trading back where it began the year. Harder hit still were high-flying 'over-the-counter' shares, which lost an average of almost 3 per cent, with the Nasdaq index closing down 25.15 points at 665.39.

Wall Street's decline also put the skids under the London stock market, although the marking down of prices was more important than selling pressure. The FT-SE index of 100 leading company shares closed 33.7 points lower on the day at 2,812.2, having been less than 4 points down in mid-afternoon.

Sterling and London shares had been helped earlier in the day by the unexpectedly large pounds 3.8bn repayment of public sector debt in January and by the relatively upbeat survey of retailers by the Confederation of British Industry, suggesting caution on further interest rate cuts.

The message from the US debt market was ambiguous, as the price of the bellwether 30-year 'long' bond teetered up and down, at one point pushing its yield below the 1980s record low of 7.10 per cent. President Clinton himself, meeting advisers in Washington, suggested the bond market was a better indicator of reaction to his budget plan, which is to be announced this evening to a joint session of the US Congress.

But bond prices fell later in the day, causing the yield to climb back over Friday's close to 7.14 per cent, reflecting disappointment at the fact that new taxes will account for a higher portion of the deficit reduction effort than originally expected. Some economists complained that instead of two dollars of government spending cuts for every dollar of new taxes, as some presidential advisers had originally suggested, the ratios appear to have been reversed.

But most market analysts expressed doubt that the sell-off in either market would continue into another day, and some argued that Mr Clinton's speech was simply a catalyst for an overdue one- day correction in equity prices.

A large part of the decline was also explained by the threat of increased taxes for Americans earning more than dollars 250,000, 'the part of the population that makes the stock market go up and down,' noted Larry Veit, economist with Brown Brothers Harriman in New York.

Transportation issues were among the hardest hit, in part because of warnings of new energy taxes. Technology stocks such as Intel, Microsoft and Apple also suffered but a particular focus of investor panic was the healthcare sector.

While not mentioned in Monday's speech, pharmaceutical companies have become the first target in President Clinton's expected attack on medical costs, and health management and insurance companies were also sold heavily yesterday.

The pessimism was compounded by a report in the Wall Street Journal suggesting Washington was preparing 'a second round of tax increases', targeting these companies, to pay for Mr Clinton's universal healthcare plan.